A novel new approach to underwriting the costs of next generation high speed Internet - fiber to the home while addressing the challenges of reducing energy consumption and CO2 emissions and providing new revenue model for service providers.

Executive Summary

One of the significant challenges facing network operators today is the high capital cost of deploying next generation broadband network to individual homes or schools. Fiber to the home only makes economic sense for a relatively small percentage of homes or schools. One solution is a novel new approach under development in several jurisdictions around the world is to bundle the cost of next generation broadband Internet with the deployment of solar panels on the owners roof or through the sale of renewable energy to the homeowner. Rather than charging customers directly for the costs of deployment of thehigh speed broadband network theses costs instead areamortized over several years as a small discount on the customer’s Feed in Tariff (FIT) or renewable energy bill. There are many companies such as Solar City that will fund the entire capital cost of deploying solar panels on the roofs of homes or schools, who in turn make their money from the long term sale of the power from the panels to the electrical grid. In addition there are no Energy Service Companies (ESCOs) and Green Bond Funds that will underwrite the cost of larger installations.

Thursday, July 12, 2012

Google's secret strategy with the Kansas City Fiber project

[I have long been perplexed at how Google plans to make a
profit with their Kansas City Fiber project.

Originally the project was touted
as an altruistic move by Google to really understand the underlying costs of
deploying fiber in a large municipality. But as anyone who has been in the
trenches can tell you, it is not the technology that determines the cost of a
fiber deployment, but the tyranny of the take-up. If you only have an initial 10% subscription
rate then the initial cost, regardless if
the fiber is on poles or buried, can be as much as $6000 per home. If the
take-up is closer to 50% the initial cost drops to around $1500 per home and if
the take-up is close to 100% then the cost can be as low as $500 per home. The elbow in the curve for deploying fiber to
the home is around 40% take up, at which it might, just might, be conceivable to make a return in your
investment.

But Google is
competing head on with the local cable and telephone incumbents who are not
going to sit on their hands and watch Google take away 40% of their market. Since their infrastructure has been paid for
many times over through regulated rate of return on their basic service of
cable TV and telephone, they can discount their prices to next to zero to
prevent Google from making anywhere close to a 40% take up. So how is Google
going to make a profit?

In addition Google has announced that they plan to be a
facilities based competitor rather than an open network provider. Many people
may remember about 10 years ago in the .dot com boom a number of over builders
announced plans to build fiber networks in competition with telecos and
cablecos. Almost all of them went bust.

An intriguing hint on Google’s strategy is their plans to
deploy fiber above the neutral wire on the poles. Although far less cluttered than being below
the neutral wire, this means that specially trained or electrical utility crews
must install the fiber. It means that any moves adds, or changes to
the fiber splice boxes etc will require these same expensive, unionized crews. Generally when deploying a FTTH network,
drops to individual homes are installed when a customer subscribes to the
service, but with fiber installed above the neutral wire, it probably makes
more sense to deploy all drops and splice boxes during the initial build out. This also drives up front costs.

The only way for this type of strategy makes sense is if
Google plans to fiber up every home from day one. Google has a habit of shaking up the world. Remember when it first offered free Gmail with
one gigabyte storage? The critics claimed
it could not be done or Google would go bust. But Google proved them all wrong.

I suspect the same story is about to happen in Kansas City.
Google will offer a basic free high speed Internet to each and every home,
perhaps bundled with Google TV using their new set top box. A variety of premium services will also be
offered for additional fees. I would not be surprised that Google decided to
offer a basic 1 Gbps service to every
home. This would clearly differentiate Google from the cableco or telco and
make it almost impossible for them to compete without undertaking a massive
investment themselves.

Those who elected for the free service would have a Google
side bar or screen splash on their TV or computers that are hooked to the
Google set top box. Google would then
hope to make money by extending its current business model largely through
Google TV. Google may make extra money
by also making their set top boxes WiFi 2.0 compatible so they can offer a city
wide wireless network as well – much like Free is doing in France.

France’s Free network is probably the closest model that
Google plans to emulate. However even
with Google TV I think Google is going to have a tough time making money. To pay for the fiber alone, they will need to
earn $10-$20 per month from each household over the next 5 years. I don’t think highly selective advertising via
Google TV will be enough. Negotiating all
the TV rights and channel offerings will also be a challenge.

The other potential area for Google to make money is operating
as an ESCO (Energy Services Company). Google, as well as Microsoft and many
other companies have tried to interest customers with tools to monitor their
energy consumption. But customers are
not interested in saving energy – if they did everyone would drive at 30 miles
per hour, as everyone knows gasoline consumption climbs significantly the
faster you drive. Energy prices are also likely to drop because of
abundance of gas and a surplus of electrical grid power. So rather than
enticing customers to monitor their energy Google, in partnership with the
local utility, could offer to peak manage the customer’s power usage, by
briefly turning off air conditioners and hot water tanks. They could also install smart thermostats and
other devices to further reduce energy consumption. The money in the energy savings would use to
pay for the fiber or premium services, rather than being returned to the
customer as piffling amount of energy savings.

Bundling broadband
with energy is the huge revenue opportunity for Google. The energy market has
virtually remained unchanged since the 19th century. The energy market is many, many orders magnitude
larger than the advertising market.
Rather than trying to save customers a few dollars a month in energy, it
would be far more effective to offer consumer something more tangible and with
a higher perceived value such as free high speed Internet.

For more background information please see my blog on Free
Fiber to the Home

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About Me

Bill St. Arnaud is a R&E Network and Green IT consultant who works with clients on a variety of subjects such as the next generation research and education and Internet networks. He also works with clients to develop practical solutions to reduce GHG emissions such as free broadband and dynamiccharging of eVehicles (See http://green-broadband.blogspot.com/) . View my complete profile